Short-Term Gains Result in Long-Term Losses for a Big Pharmaceutical

September 7, 2016

A few weeks ago, a high-profile and once extremely profitable pharmaceutical company had another setback as a US mutual fund filed a lawsuit against the struggling drug maker. In the past year this company has gone from being the largest company on the TSX (by market cap) to losing over 90% of its value as its business model continues to unfold. According to several sources including Business Insider, Bloomberg, and Financial Times, the root cause of the company’s meltdown is simply the business model it used to get to the top.

Put simply, this pharmaceutical juggernaut created profits and growth through acquiring other businesses and increasing the profits on their newly acquired product lines. Of course, with the significant operational leverage required in pharmaceuticals, profits were achieved by cutting fixed costs and increasing prices to drive profit margins. These price increases were especially prominent in late 2015 when Turing Pharmaceuticals hiked the price of Daraprim by over 5000% overnight and brought excessive media attention to a controversial practice.

Regardless of the tactics used by this company and competitors, the acquisition-driven business model was flawed for two reasons:

While specialty pharmaceuticals can take advantage of the power dynamics of the market and charge high prices, the use of this strategy by all companies would cause excessive costs that insurers simply cannot afford. As we see now with the United States, payers are beginning to push back on these companies in order to keep costs affordable.

Cost cutting must be targeted in the right areas to be effective. In this specific case, the reduction of Research and Development undermines any ability the company has to continue to create valuable products rather than buy products (at a premium) from others.

Taken together, we can understand why this pharmaceutical company cannot be as successful in the long-term as it has been over the past few years. Instead, to achieve long-term and sustainable growth pharmaceutical companies need to know the right places to cut costs. This is where we can help. Our knowledgeable consultants can pin-point areas that can help reduce your costs without sacrificing quality, innovation or customer loyalty.

This blog was written by Andrew Soave, Consultant at Trindent Consulting. He has experience in the healthcare industry creating standardized operating procedures and eliminating redundant processes.